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Gilead Back to Neutral

We are reverting to a Neutral recommendation on Gilead Sciences, Inc. (GILD) as we believe that the current price reflects all the positive news. Consequently, there is limited scope for stock price appreciation at Gilead. The stock carries a Zacks Rank #3 (Hold) in the short run.

Why Back to Neutral?

Gilead reported in line adjusted earnings of 48 cents per share in the second quarter of 2013. The company’s second quarter earnings were above the year-ago figure by a penny. Revenues climbed 15% to $2.77 billion, surpassing the Zacks Consensus Estimate of $2.68 billion. The year-over-year increase in total revenue was attributable to higher product sales. Foreign exchange fluctuations adversely impacted product sales by $21 million.

Newly launched products like Complera/Eviplera and Stribild did very well in the quarter. The product portfolio was further strengthened by the European approval of HIV drug cobicistat (150 mg version) a few days ago. The drug will be marketed in the EU under the trade name Tybost.

Gilead expects 2013 product revenue in the range of $10–$10.2 billion, reflecting an increase of 6%–9% over 2012 levels. We expect Gilead to easily achieve the guidance driven by its strong product portfolio.

Gilead boasts of a robust pipeline led by the late-stage HCV candidate, sofosbuvir. The candidate is under review both in the U.S. (target date: Dec 8, 2013) and the EU. Gilead is highly optimistic about the potential of sofosbuvir. We expect sofosbuvir to be approved in the U.S. in December.

Approval of sofosbuvir would bring down the duration of HCV therapy to 12-16 weeks. Moreover, the current standard of care comes with several side effects, which make it difficult for patients to remain on treatment. Approval of the candidate would not only boost Gilead’s top line, but also strengthen its position in the lucrative HCV market. A sizeable population suffers from HCV the world over. However, the treated population is much lower. This leaves the field open for new treatments. Apart from the late-stage pipeline, Gilead has multiple candidates in mid/early stages of development. The successful development of the pipeline candidates will help drive growth.

We believe the current price reflects all the positive news and are reverting to a Neutral recommendation on the stock from Outperform.